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5 Tips To Improve Your Odds Of Getting A Small Business Loan

You aren’t going to walk into your local bank, fill out a loan application and get approved on the spot. So, start yours right away. As in today.

Anna Johansson

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Small Business Loan

In a perfect world, every entrepreneur would have the resources necessary to transform a killer business idea into a smashing success. However, as you know by now, that’s not how it works.

In fact, having a great idea is only part of the equation: At some point, most entrepreneurs need a small business loan. Unfortunately, however, getting approved for a loan can be challenging if you don’t have all of your proverbial ducks in a row.

Five tips for getting approved

When it comes to getting a small business loan, you have to put yourself in the shoes of the bank or financial institution that you’re interacting with. If you were in their role, would you feel confident loaning money based on the set of circumstances and factors an applicant provided, and the interview process?

Once you flip the script and look at things from their perspective, you should be able to see your situation in a less biased light.

Related: How To Start A Business With No Money

That being said, here are a few tips for getting approved.

1Start the process asap

You aren’t going to walk into your local bank, fill out an application, and get approved for a loan on the spot. The approval process can take weeks, if not months to unfold. That’s why it’s best to start the process as soon as you can.

Don’t wait until you need the money or you may end up with your back against the wall.

2Deal with your credit history

credit history

While you may desire separation between your business and personal finances, lenders will factor in your personal credit history when determining your risk level as a borrower – there’s simply no way around it.

If you’re worried about this part of the process, focus on some ways to improve your credit score. According to Credit Sesame, your credit score is made up of the following five factors: Payment history (35 percent), credit utilization (30 percent), credit age (15 percent), account mix (10 percent) and credit inquiries (10 percent).

As you can see, payment history and credit utilisation make up the bulk of your score. By paying bills on time and using less of your approved credit line, you can bump your score up a few points in a matter of months. Realistically, you’re going to have trouble getting a small business loan from a traditional lender if you have a score of 660 or lower. Ideally, lenders want to see a score of 720 or higher.

Related: What Funding Options Are There For Entrepreneurial Businesses In South Africa?

3Have a detailed plan for using the money

When speaking with a lender, be very clear about how the money will be used. Giving some vague or general response about growing your business isn’t going to work. The lender will want to know exactly how the money will be used in order to determine the feasibility of your application.

Every business is different, but a few of the smartest ways to use a loan include an inventory purchase, business expansion, administrative expenses and capital investments. You may also choose to refinance or pay down debts, but lenders won’t always look at these uses with high regard.

4Be organised and over-prepared

Organisation plays a key role in whether or not you’ll be approved for a small business loan. If the lender asks for a specific piece of information, you need to be capable of providing it in a timely manner. A lack of organization shows that you’re unprepared and risky.

The best thing you can do is over-prepare ahead of time. By having ready every possible piece of information or documentation that your lender could want, you can wow him or her with your efficiency, and take control of the process.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

5Get advice from experts

Asking a lender for $100,000 to grow your business is one thing. But totally different is setting up a meeting and explaining that you’ve met with your financial advisor, accountant and board of directors, who have determined that you need $103,000 to expand your production facility and lower your cost of goods sold.

As mentioned, lenders want to see a specific plan. They also want to know that you aren’t acting alone. They like to see that you’re communicating with experts in your field and fully understand the situation.

Improve your odds

Getting approved for a small business loan is no easy feat. The burden of proof is on you to convince the lender that you’re worth the risk associated with lending money.

Put yourself in these people’s shoes and think about how you look. Be sure to address your shortcomings and highlight the positives to improve your odds of being approved.

This article was originally posted here on Entrepreneur.com.

Anna is a freelance writer who specialises in social media and business development.

Company Posts

Alternative Finance – Filling The Gap

Alternative Finance is finance beyond the traditional – it is defined by the financiers’ area of specialisation – by what they specialise in, whom they serve, and how they provide their funding.

Spartan

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Alternative Finance is finance beyond the traditional – it is defined by the financiers’ area of specialisation – by what they specialise in, whom they serve, and how they provide their funding. It does not replace traditional finance but rather functions as a complementary and additional form of funding.

Alternative financers are specialists – they focus on a particular need and on a specific audience. As a result their ‘how’ is customised to deal with their chosen target market and for this targets unique needs. This applies to the funder’s processes and to their level of flexibility around things such as collateral. An example of this is that a SME may have an existing R1 million overdraft (their traditional finance) secured by R 1.5 million collateral but suddenly they need R5 million for some kind of contract or bridging finance – they need it fast and don’t have that extent of collateral.

The traditional funder cannot provide what they need, their process is too long and their flexibility is too low. An alternative financier providing bridging finance and specialising in SMEs is ideally positioned to fill this gap.

Related: 5 Key Questions To Answer For Raising Funding

One of the most significant differences between a traditional funder and an alternative financier is in their process. In the case of the alternative financier, they have often chosen to deal exclusively with a particular customer base, for example SMEs. As a result, this funder has both an affinity and contextually relevant empathy in working with SMEs.

Not only do they speak the same language the funder also has an appreciation for the time and material constraints of the SME and has developed their processes to cater to this market. This applies most notably to the turnaround time of the funding need and to the assessment aspect – where flexibility around things such as collateral is vital in making the finance happen for the SME.

A traditional funder is unable to meet the deadline of a bridging finance need, submitted on an urgent basis, where the finance is needed as soon as 2-3 days from time of application. A specialised or alternative funder is able to do exactly this. A traditional funder is also unable to find creative methods in solving the SMEs lack of high-value collateral in applying for finance.

This SME has generally already used their high-value collateral for traditional credit facilities but now needs funding for growth or resolution of a temporary cash flow challenge. An alternative financier is able to look at such an application in a different way, and has most likely already established alternative ways to make this happen for the SME.

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How to Guides

CrowdFunding As E-commerce In South Africa

Crowdfunding is the new bank loan, without the pressures of repayments. This is why you should look into crowdfunding your ecommerce business in South Africa – from our experts.

GG van Rooyen

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Nicholas Dilley

“Crowdfunding is the new bank loan, without the pressures of repayments. Crowdfunding is an online method of fundraising that allows people all over the world to put their ideas or pitches onto a digital platform. These pitches are then available for people worldwide to see, and to decide whether or not they would like to support the campaign. There are four main types of crowdfunding: Rewards-based, donation-based, equity-based, and debt-based, each with its own unique purpose,” says Nicholas Dilley of South African crowdfunding platform Thundafund.

“In South Africa, crowdfunding is still a relatively new concept and with many South Africans sceptical about making online transactions, it’s very much a rising industry. Rewards-based crowdfunding has become a growing force. Thundafund is the brainchild of entrepreneur Patrick Schofield, who founded the company in 2013. The way that rewards-based crowdfunding differs from any other form, is that in exchange for the money raised, the project creator is expected to give something back to the backer in the form of a reward. These rewards can vary, anything from a thank you card to a tangible product. However, when selecting rewards for your campaign, it is important that you keep your project and potential backer in mind.”

Related: Kickstart Your Business Through Crowdfunding

In 2017 alone, Thundafund raised more than R8 million, which was almost equivalent to the previous four years combined.

“In South Africa, we say that, realistically, you can expect a maximum of R150 000 in crowdfunding. However, we are constantly being surprised. It really comes down to how amazing your project is, how big the network is, and if the rewards are what people want. There is no reason to believe that any start-up couldn’t raise over  R1 million if founders put the work in and justify how the money will be spent,” says Nicholas.

The rising of Sugarbird Gin

rob-heyns-sugarbird-gin

One of Thundafund’s biggest recent success stories was Sugarbird Gin, which managed to raise R1 086 973. The gin is an idea conceived of by a four-person company called Steel Cut Spirits.

“As a company, we care about crafted products that have a story and an ability to excite, inspire and bring people together. We also have a proudly South African desire to put our produce on the global map, and an interest in great local gins that can use fynbos to create amazing flavours,” says Steel Cut Spirits CEO, Rob Heyns.

Despite having already had success in the industry, Rob and his co-founders identified crowdfunding as one of the best ways to bring Sugarbird Gin to the market.

“All FMCG products face the three-part challenge of competition, barriers to scale and working capital constraints. The model of rewards-based crowdfunding addresses all three of these challenges at the same time,” says Rob.

“By launching via a crowdfunding campaign, we were able to stand out from many other products on the market, and involve our new friends and fans in our ongoing mission at the same time.

“We were able to operate at scale from day one by consolidating these first orders and thus produce great gins at a better price by working with the volumes of more established gin companies. We were also able to access funds upfront before producing batches, which provided the cash flow needed to grow quickly. There are very few better ways than crowdfunding to test a concept, solve cash flow issues, scale to proper production from day one and stand out from the competition. When I decided to go ahead, I studied crowdfunding thoroughly for two months while ensuring that our team had the required skillset to be able to execute.”

Related: How Stokvels Allow You To Make Smart Purchases Through Group Buying Power

With the crowdfunding of Sugarbird Gin, Steel Cut Sprits decided to treat the campaign like the online selling of a product.

“Rewards-based crowdfunding is essentially a form of e-commerce, as you are selling products or services, so we approached it from the angle of an e-commerce campaign. Your product and marketing thus need to be spot on. We employed an evolving product strategy of refining our offers based on sales feedback before and during the campaign. We also applied a plethora of online marketing strategies, including audio-visual, digital marketing, social media, PR and even direct selling to large potential backers,” says Rob.

Nicholas agrees that crowdfunding needs to be approached in a professional manner. Most people will judge your business purely on your crowdfunding campaign and its funding page.

“Businesses and start-ups must have campaigns that appear very professional. The campaign should also be viewed as a marketing exercise that will allow the entrepreneur to test his or her product in the real world and receive feedback. Doing fun activations, like launch parties and events can also be a great way to get the word out there about your project and brand.”

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SAB Transforms Supply Chains

Supplier Development Programmes grow black-owned suppliers and create jobs.

South African Breweries (SAB)

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The South African Breweries (SAB) has invested more than R200 million into creating an inclusive supply chain that incorporates black-owned and black women-owned SMEs through its supplier development programmes, SAB Accelerator and SAB Thrive. In addition, more than 100 jobs have been created through these efforts.

SAB Accelerator and SAB Thrive aim to create a diversified and inclusive supply chain by supporting the growth of black-owned suppliers through business development support and funding. The programmes are two of four entrepreneurship development programmes run by SAB to help create 10 000 jobs in South Africa by 2022 — SAB KickStart, SAB Foundation, SAB Accelerator and SAB Thrive.

SAB’s agriculture programmes also contribute towards the aim to create jobs by growing emerging farmers.     

Related: SAB-Commissioned Research Shows SA Poised To Reap Entrepreneurship Rewards

“From rural entrepreneurs to big business, SAB has laid the foundation to support entrepreneurs and to contribute towards government’s efforts to grow the economy and reduce unemployment in the country,” says Ricardo Tadeu, Zone President, SAB and AB InBev Africa.

“We recognise that one of the major hurdles for SMEs in South Africa is the ability to gain entry into big business and form part of their supply chains. This requires a symbiotic relationship with big business working alongside smaller suppliers.”

SAB Accelerator and SAB Thrive cohesively solve the challenges of creating a healthy pipeline of suppliers that represent the demographics of the country. SAB Accelerator has piloted ten businesses that have created 29 permanent and 79 part-time jobs in a period of just six months, and is currently incubating 24 businesses as part of the official post-pilot intake. SAB Thrive has invested R100 million in seven businesses, which have created 46 new jobs. In addition, the programme has contributed R140 million in new B-BBEE preferential spend.

The SAB Accelerator is an in-house programme dedicated to developing black-owned and black women-owned suppliers. Geared towards fast-tracking participants’ growth, the programme employs ten highly experienced business coaches and ten engineers, offering both tailored business and deep technical coaching to the participants.

It has a three-phased approach consisting of:

  1. Diagnostic: Screening the business’s current situation and systematically identifying gaps and opportunities for growth.
  2. Catalyst: Proposing an intensive three-month coaching intervention addressing key business functional and technical areas of improvement or growth.
  3. Amplify: Providing additional business development to support graduates of the Catalyst Programme.

The SAB Accelerator strongly focuses on enhancing market visibility and access of its participants.

Eligibility criteria:

  • Existing black-owned or black woman-owned suppliers currently servicing SAB’s supply chain at the time of application.
  • Existing black-owned or black women-owned businesses that have potential to join the SAB supply chain based on their product or service.

The SAB Thrive fund is an enterprise and supplier development (E&SD) fund set up to transform the company’s supplier base. The fund was established in partnership with the Awethu Project, a black private equity fund manager and SME investment company. The aim is to invest in and transform SAB suppliers to represent our country’s demographics. SAB Thrive investees benefit from 100% black equity capital and business support.

Related: 6 SAB Entreprenurship Programmes That Provide Business Management And Support

The fund invests growth equity capital into SAB’s existing high-growth black-owned suppliers, furthering their profitable expansion into the SAB supply chain without diluting the black-ownership of these businesses.

Existing white-owned suppliers are provided equity capital to support the enhancement of their black ownership, while facilitating the introduction of black entrepreneurs to their business. The intention is to apprentice the individual to take over the business in the near future.

Eligibility criteria:

  • Black-owned suppliers in the SAB supply chain that want to grow their business through access to black-owned growth equity capital.
  • Existing white-owned suppliers in the SAB supply chain that want to transform their B-BBEE ownership.

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